On March 7, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to stay a putative class action brought by legacy stockholders of DiamondPeak Holding Corp., a special purpose acquisition company (“SPAC”), alleging that its directors and controlling stockholders breached their fiduciary duties in connection with the SPAC’s acquisition of Lordstown Motors Corp. (“Legacy LMC”). In re Lordstown Motors Corp. Stockholders Litigation, CA. No. 2021-1066-LWW (Del. Ch. March 10, 2022) (the “Delaware Action”). Plaintiffs alleged that defendant directors failed to disclose certain information about Legacy LMC’s business and that the SPAC’s controlling stockholders pursued the acquisition to advance their own interests to the detriment of minority stockholders. Defendants argued that the Delaware Action should be stayed pending resolution of an earlier-filed securities class action (the “Securities Action”) in the United States District Court for the Northern District of Ohio. The Court declined to grant the stay, reasoning that application of Delaware fiduciary duty law to SPACs “raises emerging issues” and that the Court’s “essential role in providing guidance in developing areas of our law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.”
The SPAC acquired electric truck company Legacy LMC in October 2020. In March 2021, an analyst report purported to identify problems faced by the company, after which its stock dropped. In the Securities Action first filed in March 2021, stockholders are asserting claims for violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 and alleging misstatements in the proxy statement issued in connection with the transaction.
In the Delaware Action, first filed in December 2021, plaintiffs purport to represent a putative class of SPAC stockholders who continuously held stock from the record date for the transaction through its closing. Plaintiffs allege they were harmed by not exercising their redemption rights.
Defendants filed a motion to stay under the doctrine established in McWane Cast Iron Pipe Corp. v. McDowell Wellman Engineering Corp., 263 A.2d 281 (Del. 1970), which gives the court discretion to grant a stay where “there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.” Defendants argued that allowing the Delaware Action to proceed in parallel with the Securities Action would tax the resources of the Court and the parties, that the Delaware plaintiffs represent a subset of the class represented in the Securities Action, and that the breach of fiduciary duty claims in the Delaware Action were premised upon the same statements alleged to be misleading in the Securities Action.
Highlighting that the Court of Chancery had only applied Delaware fiduciary duty law to a single SPAC case—In re MultiPlan Corp. Stockholders Litig., C.A. No. 2021-0300-LWW (Del. Ch. Jan. 3, 2022) (as described in our prior post)—the Court rejected defendants’ application. The Court noted that “[t]he Court of Chancery has long been chary about deferring to a first-filed action pending elsewhere when a case involves important questions of our law in an emerging area.” The Court further explained that, although the Delaware Action and the Securities Action are based on common facts, the issues presented are distinct, as the Delaware Action concerns allegations “that the defendants harmed the putative class members by impairing the informed exercise of their redemption rights to the defendants’ benefit” which are “quintessential Delaware concerns—not, as the defendants argue, a rebranding of securities claims about material misstatements as fiduciary duty claims.”
The Court further noted that the Securities Action names only one of the Delaware Action defendants and that, though they overlap, the actions’ proposed classes are distinct. The Court added that the two actions seek different remedies, as the Securities Action plaintiffs seek to recover damages allegedly caused by a decline in stock price, while in the Delaware Action plaintiffs seek damages related to a $10 redemption right.